.The recent stock market crash has caused many investors to experience paper losses on their holdings. This may lead them to fear future market downturns, since they can quickly lose money over a short time period when the stock market is falling.
However, indexes such as the FTSE 100 and FTSE 250 have always recovered from their previous downturns to post new highs. Therefore, rather than worrying about future market declines, they could prove to be opportunities to buy cheap stocks to boost your prospects of retiring early.
Buying opportunities in a stock market crash
Investors who continue to hold shares through a stock market crash stand to benefit from the subsequent bull market that’s always followed a market decline. As such, holding stocks instead of selling them due to concerns about accumulating greater losses is often a sound move to make during a market downturn.
The same logic can be applied to buying shares during a bear market. Investors can access low valuations that may only be available for a relatively short period of time. For example, this year’s market decline lasted for only a matter of weeks before a rebound commenced. Furthermore, history suggests the index is likely to return to its previous highs in the coming years. Even though some FTSE 100 and FTSE 250 shares haven’t yet fully recovered.
Therefore, investors who are able to overcome their natural fear during a stock market crash to purchase a diverse range of shares could generate high returns in the subsequent recovery. Certainly, this can lead to further paper losses in the short run due to high market volatility. However, doing so may improve their long-term financial prospects.
Regular market downturns
Of course, a stock market crash may not occur for a prolonged period of time. Factors such as a vast scale of monetary policy stimulus and receding political risks in 2021 may mean share prices move higher over the coming months and years. This may reduce the buying opportunities available to investors.
However, history suggests that market downturns occur fairly regularly. Therefore, long-term investors are likely to experience a substantial number of them during their lifetime. This means that planning for them could be a shrewd move. That will enable you to fully capitalise on the buying opportunities that they can present.
As such, holding some cash to quickly react to a stock market crash could be a shrewd move. Similarly, identifying attractive companies that are currently overpriced may mean that you are in a good position to react to their temporary stock price falls. Doing so can produce high returns over the long run. Over time, this may improve your portfolio’s performance and help to bring your retirement date a step closer.
